Free Memorandum in Support of Motion - District Court of Connecticut - Connecticut

f irsL,\'atlOnal Life (nsurance CQmpany of .-meri(.), Case in IiquidatÙ:m 3:01-cv-01515-EBB Document 55-2
Post

Filed 06/03/2005
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Page 1 of 12

Office Box 11316

Birmingham, AJabama 35202-1316

POC :- n,

205-942.2112

."iai)in~ Date 05-12.2000

PROOF OF CLAIl\1
!\OTE: Final date for filing this Proof of Claim is JU~E 29, 2000
Il)is Proof of Claim must be romDleted.,sig..~a..~n~--et~.i:ny.d..o the al)(.!'!e addre.5S. postmJrked bv Ji;~E 29, 2000.

READ ALL OF THE i~STRL..DIQ:'~Q.~_:r.!:E FRO,"T ..~D RACK OF THIS FOR.\i BEFORE CO,\fPLETl"G PLEASE TYPE OR PRINT
Enter Amount qa--!Ted. if any:
$

., .._----

:'~ll~S~~~~~_g~~~r.~~~~~.~~~~~~~,. .:~~; .. Claim is for agent cOr.lS$lOfl :.: L-. ':;fh~ ¡;~iJ¡¡-iÙ~r)i;Et~~i(ö:cm.iflii::;-::' :.::~.~..

~~ël'~ai:~~~~§~ig:,~~~-:~.~.it:l~de' " "

$ $
--

C1Jim is for deiicjency of stci.m:d claim . ¡=~: '+~'~~;~~~£~~~i~~~.
. :. ..: ::rê"P~J:--.Q~-å:;:':::~:::~' '. , .
Claim iS for trade or g~nera¡ .:editor debts due from FNL . - · ';~T.ir~~~~~~iù.~!%~~~~~~~'.
... ,,, TT... 3 :: '."2 COcmCi::u.¡i:seta.UJe:claI

_.-....

C!airn is for ~pio~l'c l.omp:r.sati0n c:r ::en::~it:; due

S 14,689.593.00* Claim of a ceding or a~$L:mii~ In,urJnce company
.5

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Claim of hdcral, State: or lCI.;;1 govcrinent
----- - -.. .
CIJIr. of a Guai~n(y As~oc1Jio:1

f : IT fh e: .:o'u ñ i '.i: f,)~Q u.Ü:läi iifTs-llJWw ii,. tlie .ío ll t m.:y bt

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. woo rcpicòòtt rhê -~m~t ïf añy, ... ; . ,'~ . .

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r:-o-niin:a-aiiifi~~mrl'~~ii:ii¿C~.':"," .. .
$

I "UIldd-''~~ -=.;. - . ':.', _."

$ 14.689.593.00 jt Othe:' (provide cxplanarron 0n ,~parate sheet)

I':: J.n¿'iic!~ ;he nme- arrJjadT~:~t~tb~ cia:i)~int ~~d.¡¡i~ a-(u:m;¿y +See '$LaLLnt of Cla1~ Attached Hereto; Claims are for $14,689,593.00, and alT proeeds and earnings theref~.

. -.. . . - .. ...

1~

The undersigned iubsC'r;bes Jnd ;;ffrnni JS ¡rue under ih~ p~n.i:iies "r p~rJur:- as rv)ìows that he/she has ~~d ¡he fCI"~('I~g Proof cf cc~:rT an:! 31uehmenis thereto 3nd :oow~ ,hc eontcnt! thcreot. IhJT ¡he ~Jid c!;¡lJ1 JgJiiisllt-c J:'vvc' '¡¡:::ieú :ooii¡nny IS tr;;e "flus!,('r OWT i(nowJccgç oeep' ~510 the rr~:ler1lhe'cin iuted 10 De J11cgN ;;Jon
In:orm3¡1(!n and IIdief and a~ Ie) IhQ$ rmtterr Increin ~!d!~ri:- he 'lIe~ed "p,'n rr';orm::ttnn Jnd !xlicf Jnd a' In Illn'C m.nerc he/,he believe":n he tToc. ibi nC) pJyn,c-i oJ CJ cr: J.,uun~ of the Jfore~:.ic1 ..ain' ha, heen maiic CXCC! JS staleG h",,,:n. ihJt :hc-- an: no ,elo:T,. munlc-rl~irr) vr úd,;nsc Inc:-ilI, thaI .; ~imi-¡ :s nul ~ ,c"JroJ "",vilor VI

dJ'~U h.. no ~ci:irr1ty =xC'cpi as 'tated hC1ln. Peopl es Benef1 t L'Ì fe Insurance COI and Veterans L; fe
AltOT"cy for Claimant. i f any. sign on this line

- ~~B.,~~~ Insun ~,COl ny ?
By: 'Uchael A. Eubanks.... Vice-Preident
Indi'v icua. Claiman: or Corporate NarT and omc:: . Pleasc Pri~t
520 Pilk A..enue

--~--~st ß. L~man. Esq. A:-omey for Claimant, if any - Plta.;c Prni
115 S. Lasalle Street

Sirci:i Number

Stre~ :-umcer
Baltfnore. Maryland
lip Code

Chicago. ILL fno1s 60603
City and State

21201
Zip C:)de

r:i:y ::r.d Statc

:vaiJing i- i~t '\umher ~4 70,

Rcccrcnce Info I
Co CoJ~ 07

PEOPLES RENEFIT LIFE I¡"S ATJ. FOREST B. LA\-1ME'v1¡\~ lORD. 81SSEU & RROOK ItS SOUTH LASALLE STREET
CHICAGO. II" 60603

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STATEMENT OF CLAIM: ADDENDUM TO JOINT PROOF OF CLAIM OF PEOPLES BENEFIT LIFE INSURCE COMPAN AND VETERANS

LIFE INSURCE COMPAN IN THE LIQUIDATION OF FIRST NATIONAL LIFE INSURACE COMPAN
Mississippi v. First National Life Insurance Company of America. A Mississippi Domiciled Insurance Company In the Chancery Court of the First Judicial Distrct, Hinds County, Mississippi Civil Action No. G99-908
the State of

Re: George Dale. Commissioner ofInsurance of

Peoples Benefit Life Insurance Company ("Peoples") and Veteran Life Insurance
Company ("Veterans," and together ith Peoples, the "Claimants") assert claims against the
liquidation estate of

First National Life Insurance Company ("First National") in the amount of

$14,689,593.00 (together ith all proceeds and earngs therefrom) plus pre-judgment interest.

The causes of action entitling Peoples and Veterans to the foregoing amounts include:
(1) damages for negligent misrepresentation;
(2) the retu ofthe "Fund" (as defined belo ) pursuant to the doctrines of (a) money

had and received and (b) constructive trst, or, alternatively, as the securty for a
secured claim;

(3) Retu of

the Fund upon rescission of

the contract;

(4) as alternative relief, the obligations of

Peoples and Veterans under the policies

that are the subject of

the Agreements may be novated to and assumed by the

Liquidator of

First National;

(5) possible adminstrative priority expense claims for conversion and unjust

enrchment; and

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(6) Section 83-24-83 of

Miss. Code An. as unconstitutional at the time Peoples'

and Veterans' right to recover the Fund vested and their other claims vested, and the recent amendments to section 83-24-83 (if and to any extent they other ise
may be applicable to the claims of

Peoples and Veterans) canot be applied in the

present receivership ithout violating the Constitutional rights of Peoples and
Veterans.

Peoples and Veterans expressly reserve the right to submit all disputes ith and claims
against First National and its liquidation estate to binding arbitration pursuant to the terms of

the

"Agreements" (as defined belo ).
Basis and Nature of the Claims of

Peoples and Veterans Against First National

Marin Franel as indicted in the fall of 1999 by a federal grand jur for his activities
involving Thunor Trust, First American, Franin American Life Insurance Company
("Franin") and a host of affliated insurance companes and entities. This saga began hen

Franel aranged for the formation of Thunor Trust in 1991, and then for Thunor's purchase of a

holding company, Franin American Company, and thus for Thunor's indirect 0 nership of

Franin American and other insurance companes. Similarly, in 1997 Franel aranged for
Thunor Trust's acquisition of the parent company of

First National, thus also bringing First

National and its affliates under his control. Soon thereafer, Franel caused First National and
'afliated insurance companes to invest their money in Franel's 0 n shell corporation and
began using that money for his 0 n personal benefit, as he

had already done ith the financial

reserves of

the Franin American entities. This scheme, hich has been idely documented in

the business and legal press, resulted in more than $200 millon in fuds being embezzled from
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various entities, including Peoples and Veterans. The claims of Peoples and Veterans against First National are, in the first instance, rooted
in the company's paricipation in Franel's embezzlement of

fuds from Peoples and Veterans

hen they ere improperly induced to enter an assumption reinsurance agreement ith First
NationaL.

Franel caused a holding company called International Financial Corporation (hich as
incorporated in Oklahoma but had its principal place of

business in Tennessee) to purchase First
the other

National in late 1997. Both Franin American and First National, together ith all of

companes controlled by Franel, ere 0 ned either directly or indirectly by Thunor Trust. On

information and belief, John Hackney as the only person ho actually served as a Trustee for the Thunor Trust. Hackney served as President and Chief Executive Offcer of all or most of the
insurance companes 0 ned by Thunor Trust, including Franin American and First NationaL.

Franel and Hackney aranged for First National, hich had been domesticated in
Alabama, to be redomesticated in Mississippi. On information and belief, the rationale for the

redomestication as the belief that the insurance regulatory atmosphere in Mississippi as lax,
and that Franel and his associates ould be able to ire transfer the company's reserves out of

state more readily.

In June of 1998, a broker contacted Peoples and Veterans and put them in touch ith the
'officers of

Franin American to explore Franlin American's possible purchase (via so-called

"assumption reinsurance," hich in the argot of the insurarce business means a novation of a
block of business through an assumption of the policy liabilities and a corresponding transfer of
the investment reserves from one company to another) of blocks of

business from Peoples and

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Veterans. During the course of discussions ith officials from Franin American,
representatives of

Peoples and Veterans objected that Franin American's financial rating as

not high enough to assure the safety of a transfer of significant blocks of business. In response,
offcials at Franin American (ho also ere offcers of

First National) offered First National as

the more acceptable transferee on the ground that it as the highest rated affliate of

Franin
First National,

American. Based upon these representations regarding the financial condition of

as ell as reliance upon representations by First National and Franin American regarding the
statutory financial statements of

First National, Peoples and Veterans entered into a set of

agreements ith First National for puroses of accomplishing the assumption reinsurance
transaction.

Accordingly, on or about October 30, 1998, Peoples and Veterans entered into a Master

Agreement, Reinsurance Agreement, and Assumption Agreement ith First National
(collectively, the "Agreements"), for the purose of effecting the initial transfer of

the blocks of

insurance business (including obligations and liabilities to policyholders and also including the
investment reserves created for the payment of

those obligations) from Peoples and Veterans to

First NationaL. (Copies of

the Agreements are attached as Exhibits AI, A2 and A3 hereto.)

Shortly thereafter, Peoples and Veterans fonnally transferred administrative responsibility for the

subject insurance policies to First National, although from the first those administrative fuctions

Ìn fact ere handled primarly by Franin American, at its offces in Franin, Tennessee. In
addition, the investment reserves aggregating $14,689,593.00 (together ith all proceeds and

earings therefrom, the "Fund") ere transferred by Peoples and Veterans to a ban account in
Memphis, Tennessee in the name of

First National in three separate installments - one in the
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amount of$2,134,10i.OO on Januar 19, 1999; and a final installment in the amount of
$5,267,988.00 on Februar 25, 1999. (Copies of

the transfer confinnations are attached as

Exhibit B.) Each ire transfer of

the Fund coincided ith the transfer of a specific block of

insurance business pursuant to the Agreements.

The paries understood that the Agreements ould and could not become effective until

the Mississippi Commssioner of Insurance approved the Assumption Agreement, and also
understood that to any extent that First National as prohibited from reinsurng or assumg any

of the transferred blocks of business, that block of business, including the corresponding portion
of

the Fund, ould be retued to Peoples and Veterans. The paries anticipated that the

Assumption Agreement ould be approved not later than December 1, 1998. Nevertheless, that
approval had not been obtaied hen the Commissioner ofInsurance for the State of

Mississippi

placed First National in rehabilitation proceedings on or about May 10, 1999, pursuant to an
order of

this Cour. First National's rehabilitation quickly as seen to be impossible, and its case

as converted to a liquidation proceeding pursuant to an Order of

ths Cour on June 29, 1999.

On May i 1, 1999, a Tennessee cour placed Franin American into receivership pursuant to its
Rehabilitation Order; that proceeding as converted to a liquidation proceeding hen that cour

entered its Liquidation Order on October 25, 1999. These and other receiverships ere
commenced because regulators had finally discovered Franel's looting of

these and affliated

companes.
The Fund that as transferred pursuant to the pending assumption reinsurance transaction
appears to have been taken by Franel as par of

his embezzement scheme. The Fund runs ith

the blocks of business for hich the assumption never as approved. The liquidation order for
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First National cut off all reinsurance transactions. Because the Agreements ere not and canot
be approved at this point (uness the provision of

the liquidation Ç)rder cutting off all reinsurance

agreements is vacated and modified to order the Liquidator to assume all obligations to the
policyholders ho are the subject of

the Agreements), Peoples and Veterans have reassumed
business and are entitled to the retu of

their obligations to the policyholders for those blocks of

their Fund, regardless ho may no be in possession of

the Fund.

The Fund therefore as and remains propert of Claimants; and it is not and never has
been the propert of

First National, Franin American or their estates. Under established

Mississippi la , to any extent that the Fund is or may become subject to the possession or control
of the Liquidator of

First National, the Fund is held as money had and received, remains

impressed ith a constructive trst and is not propert of the liquidation estate of First NationaL.
Thus, if the Liquidator holds or may in the futue hold or control any portion of

the Fund, the

Liquidator holds those proceeds for the benefit of Peoples and Veterans and for the benefit of the
policyholders for the blocks of

business hich ere never assumed by First NationaL.

Alternatively, the cutoff of all reinsurance obligations should be vacated to order the Liquidator

to assume the reinsurance treaty and thereby replace Peoples and Veterans as the par obligated
to the policyholders.

Upon infonnation and belief, Franin American may have received all or par of the
Fund hen it received payments from Franel's entities on or about April 9, 1999 aggregating

approximately $57 millon. Ths transfer from Franel's entities to Franin American occured
because certain regulators in Tennessee insisted that Franel's investment vehicle, Libert
National Securties, Inc. ("LNS"), retu fuds hich it controlled. Subsequently, according to

6

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documents fied by the Liqnidator ith ths Cour (as ell as ith the other COor presiding over

the related receivershps in other states), insce offcials in Mississippi, Oklahoma, Arkaas
and Missonr qnestioned Frain America's title to the foregoing $57 milion, contending,

among other thgs, tht "(a) the $57 millon as a payment to ¡Fran Amercan) in excess of
the net money origily paid by LNS to ¡Frain American), (b) the $57 mi11on as removed

!Tom fuds that ere 0 ned by ¡Franlin Amerca) and the other aforementioned insuce

companes in an account COnngled by LNS and snbject to a constrctive tr and eqnitable

distbution, and (c) the remittce of $57 miion consttud a preference under federa
banptcy la." Order Approving Compromise and Settement of

Interstte Claims at ~5.
Thus, the allegations of these receivers (including the Liquidator of

First Nationa) support the
vie tht the $57 million obtained by Frain American !Tom LNS in Apri

1999 did not belong in its entirety to Frain America. Additionally, those alegations support the conclusions that
(1) Franel, ho contrlled Franin American and First Nationa directly or indirectly, cansed

fuds to be sent to Frn American hich he 1me er neither the fuds of, nor dne or 0 ing

to Frain America, and (2) Frain America agreed to the receipt of, or took custody of,
fuds hich it had reason to believe ere (in hoJe or in par) the propert of others. The timng
fuer suggests that par of tht amount may include all or a porton of the Fund hich should be

reted to Peoples and Veteras, ho have reassumed responsibility for the blocks of business

hich the Fund as intended to protect.
Furennore, Peoples and Veteran assert that if the Liqnidator of Firt National has

received a porton of the Fund pursut to the compromise among the receivers ( hereby about
$17.5 mi11 on as to be trsfer to the Jiqnidators for F irt Nationa and related estates in
c"_'-__

7

_._..~._'--_._-----~"---_._-~---_.__.

" "

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Oklahoma, Missour and Arkansas) or by any other means, the First National receivership is
liable for an administrative priority claim based upon the Liquidator's interference ith the legal
and equitable rights of

Peoples and Veterans entitling them to have the Fund retued.

Summary of Claims
The Claimants are entitled to damages and to the retu of any portion of the Fund no or

in the futue in the control or custody of

the Liquidator of

First National, in each case up to the

aggregate amount of the Fund, plus pre-judgment interest. The claims of Peoples and Veterans
against the estate of First National for the retu of

the Fund or for damages connected ith its

loss may be sumarzed as folIo s:
1. Negligent Misrepresentation. First National negligently (and perhaps

fraudulently) misrepresented to Peoples and Veterans that First National as solvent and could
rightfully assume the subject blocks of

business, hen First National kne or should have kno n

that the assets of

First National have been tued over to Martin Franel (and perhaps others) and

ere being used for his 0 n personal benefit, and that First National thus as insolvent and thus as not qualified to enter an assumption reinsurance transaction. But for First National's

misrepresentations, Peoples and Veterans ould not have entered into the Agreements and ould
not have transferred the Fund to First NationaL. First National thus is liable to Peoples and
Veterans for the injur they suffered as a result of

their reliance on First National's

misrepresentations.
2. "Money Had and Received" and Constructive Trust. The Fund or any portion of
it that at any time as, is or may be in the possession or control of

First National is the propert
its policyholders, is not propert of

of

Peoples and Veterans for the benefit of

the liquidation

8

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estate of

First National and should be retued to Peoples and Veterans as its rightful 0 nero The
the Fund vested ith Peoples and Veterans at the time of

right to recover

First National's

rongdoing. Additionally, the Fund or any portion of

the Fund in the control or possession of

First National or its Liquidator at any time constitutes a secured claim under Miss. Code An.
§ 83-24-7(P) and that securty should be retued to Peoples and Veterans. The Fund as and
remains propert of Claimants; and it is not and never has been the propert of

Franin

American, First National, or their respective estates.
3. Rescission. Alternatively, the Agreement should be rescinded ab initio in that it

as void from the first, and the Fund in its entiety therefore should be retued to Peoples and

Veterans.
4. Assumption of

Liabilities to Policyholders by Liquidator. Alternatively, Peoples

and Veterans are entitled to specific perfonnance of the Agreements for an assumption and
novation of

the policies subject thereto by the Liquidator uness the Fund is retued to Peoples

and Veterans.
5. Conversion and Uniust Enrchment. If the Liquidator of

First National has

disposed of or used the Fund or does dispose of or use the Fund, or any portion of the Fund

through the Liquidator's compromise ith the other receivers or by any other means, then
pursuant to the doctrines of conversion and unjust enrichment, the estate of

First National is or

. il be liable to Peoples and Veterans for the damages caused thereby. All such claims are
properly classified as Class i expenses of administration pursuant to Miss. Code An. § 83-2483(1). Alternatively, applicable tracing rules may sho that any portion of

the Fund coming into

the possession or control of the Liquidator stil remains there and is held for the benefit of
9

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Case 3:01-cv-01515-EBB
Peoples and Veterans.
6. Unconstitutionali

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"'-.~ . .''''':~-:~7~'

",,".

Statute, Miss. Code An. § 83-24-83 as unconstitutional hen the Agreeents ere entered,

hen the clais of Peoples and Vetera and hen their right to the retu of the Fund vested.
Althongh § 83-24-83 has since been amended to cOmply ith the Constitution, any

Canot operate to deprive Peopies and Vetra of

amendment Agrements. Moreover, the unecurd claUns of Peoples and Vetcr also vested and under the their vested rights in the Fund prior to the

amendment and thus ar not subject to the amended prOrity statue Or Its uncOnstutional
predecessor. In addition, retactve application of the amendent ouId result in an
unconstitutiona tag of Peoples

, and Veters' if and to any extent tht the amendment other ise propert ithout benefitof Peoples and may apply to the cJai of dUe process

ofla,

Veterans.
7. Interest and Attrne s Fees. Claits seek an a ard of interest and attorneys

fees, as aIlo ed by la .

Reservation of Rights RegardIng Arbitration.
PursUant to Arcle V of the Master Agreement, Peoples and Veteras ar entitled to

subnnt all of their disputes ith and clainn against First National (and thus also its estate in

liquidation as successor thereto) for fui and binding arbitrtion of all issues. Peoples and
Veteans expressiy resere all of their rights regarding arbitrtion (or other ise) Puruat to the

Agreements.

'.-,-

10

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Case 3:01-cv-01515-EBB
Date: Jure 28, 2000

Document 55-2

Filed 06/03/2005

Page 12 of 12
..

Forrest B, Lannnan, Esq,

Attonney for Peoppes Beneiit Life inUrce

Lord Bissell & Brook y
Us S, LaSalle Stret Suite 3100
Chicago, Ilirois 60603

COnnpan and Veteras Life InsUrce COnnpan

Michael A EUbans
Vice President

Telephone: (312) 443-0414
Facsirni1e: (312) 443-0336

Peoples Benefit Life InsUrf'hce C an ets Life Insllance COlOany
520 Park A Venue

d V; . ..~ ornpany

Baltirnore, Marland 21201
Telephone: (410) 209-5485 Facsirni1e: (410) 209-5926
..

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